ADP Stock: Conservative Growth Of 13-16% In This Volatile Market


ADP office in Mississauga, Ontario, canada

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Automatic Data Processing (NASDAQ:ADP) is a buy for the total return and the dividend growth investor, a SWAN in this manic-depressive market. Automatic Data Processing is one of the largest human resources products and services companies in the world. ADP is a conservative investment for the income investor who also wants good growth potential with interest rates starting to increase. Automatic Data Processing has a good cash flow, and the company uses some of the cash to expand its product line and increase dividends each year. Automatic Data Processing is 8.25% of The Good Business Portfolio, being my IRA portfolio of good business companies that are balanced among all styles of investing. I normally start to trim a position when it reaches 8% of the portfolio, but right now, I will hold this stable defensive company.

As I have said before in previous articles.

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guidelines, March 2020”. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average.

The Fundamentals

Automatic Data Processing is the largest provider of human resources data processing in the United States and foreign countries. The Company provides business process outsourcing solutions. Its segments include Employer Services and Professional Employer Organization (PEO) Services. These services include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services.

One of the main reasons to own ADP is to have a steady quarterly income with the potential for good growth. Automatic Data Processing does meet my dividend guideline of having increases in the dividend for 8 of the last ten years and a minimum of 1% yield. Automatic Data Processing has an average dividend yield of 2.0% and has had increases for 47 years, making Automatic Data Processing a good choice for the dividend growth investor that wants consistent growing income. The dividend was last increased in November 2021 for an increase from $0.93/Qtr to $1.04/Qtr, or a 12% increase. The five-year average payout ratio is moderate at 58%, which allows cash remaining for increasing the business of the company by adding new processors and features to existing programs. The cash flow drives ADP stock price up, and the company returns the cash to the shareholder with increasing dividends each year. Increasing interest rates are a tailwind since the company will make large gains on the increasing payroll float. The graphic below shows the effect of the interest rates on the payroll float.

Client funds gains

Client Funds Detail (Q3 Earnings call slides)

I only like large-capitalization companies and want the capitalization to be at least greater than $10 billion. Automatic Data Processing easily passes my guideline. Automatic Data Processing is a large-cap company with a capitalization of $87 billion. Automatic Data Processing’s 2022 projected operating cash flow of $3.1 billion is great, allowing the company to have the means for company growth and increasing dividends each year. Large-cap companies like Automatic Data Processing have the cash and ability to buy other smaller companies and weather any storms that might come along. I also look at the S&P rating and want it to be three stars or better. ADP’s S&P CFRA rating is three stars or hold with an estimated target price of $230, passing the guideline with a possible gain of 9.5% this year to meet the target. ADP’s price is below the target price at present and has a high forward PE ratio of 30, making ADP a fair buy at this entry point. I rate Automatic Data Processing a buy for future growth and a good growing income; quality does not come cheap. ADP is a SWAN that has constant growth over many years with a dividend 5-year growth rate of 12.36%.

I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on April 27, 2022, Automatic Data Processing reported earnings that beat expected at $2.21 by $0.13, compared to last year at $1.89. Total revenue was higher at $4.5 billion more than a year ago by 10% year over year and beat expected total revenue by $50 million. This was a great report with a bottom-line beat expected, the top line increasing, and a bottom-line increasing compared to last year. The next earnings report, Q4, will be out in July 2022 and is expected to be $1.44 compared to last year at $1.20, a nice increase. The graphic below shows earnings for Q3 of 2022 compared to last year.

Q3 Earnings data

Q3 Earnings comparison (Q3 Earnings call slides)

The great ADP total return of 193.42% compared to the Dow base of 79.20% over my 77-month test period makes ADP a fantastic investment for the total return investor. The steadily increasing dividend income for 47 years keeps ADP as a buy at the present price. Looking back five years, $10,000 invested five years ago would now be worth over $23,900 today. This gain makes ADP a good investment for the income investor looking back, which has future growth as increasing interest rates have started to increase earnings. Overall, Automatic Data Processing is a good business with a 9% CAGR projected growth as the United States and foreign economies grow going forward, with the increasing demand for ADP’s services. The good dividend income brings you cash as I continue to see further growth as the world economy grows. As interest rates increase, so will ADP’s earnings on the payroll float, and this increase adds to the gain from product innovation sales increases.

A quote from the 3rd quarter earnings call by the CEO Carlos Rodriguez sums up the good expectations for the company going forward.

We delivered exceptionally strong third-quarter results, including revenue that accelerated to 10% growth on a reported basis and 11% growth on an organic constant currency basis, coupled with solid adjusted EBIT margin expansion. The strong outcome on both revenue and margin drove 17% growth in adjusted diluted EPS, well ahead of our expectations. Our clients have had a new shortage of challenges in navigating the last 12 months, but through it all, not only have they persevered, but they have invested in their workforce to better support their employees and continue to grow their businesses. We’re proud to support them in these efforts through our leading HCM technology and unrivaled expertise. Let me start with Employer Service’s new business bookings. We are very pleased to have delivered another strong quarter of double-digit growth. This was a record level for the third quarter. And as we had hoped when we updated you last quarter, the Omicron variant was not a meaningful factor in the performance of our booking, as third-quarter growth accelerated from our first half levels towards the high end of our guidance range this quarter. Our clients continue to find tremendous value across our suite of offerings with our PEO and HR outsourcing, international and down-market businesses, again, leading the way.

The graphic below shows the CEO’s perspective of the company with a diverse set of products in 140 countries for worldwide diversification.

Global diversification

HCM global leader (May 5th investor presentation)

This shows the feelings of top management for the continued growth of the Automatic Data Processing business and shareholder return. ADP has good growth long term and will continue as the world’s employment budgets grow with the world economy. This year’s projected growth is getting to normal growth as the COVID pandemic is being controlled by the vaccines. The graphic below shows the outlook for the 2022 fiscal year.

projected growth

2022 projected growth (May 5th investor presentation)

Risks and Negatives of the business

The obvious risk for ADP is that another mutation of the COVID virus will not be controlled by the vaccines that are being used today, and we have another downturn until a new vaccine is developed. Interest rates have just started to increase, which is a plus for ADP, but if interest rates get too high, this will be a negative as the labor force decreases. ADP has great products, and they keep making modifications to improve their sales, but the business they are in is very competitive, so they must keep up with the competition.


Automatic Data Processing is a good investment choice for the total return and dividend growth investor with its average dividend yield with steady increases for 47 years and high total return. Automatic Data Processing is 8.25% of The Good Business Portfolio and will be held to watch it grow. ADP will be held in the portfolio and will be trimmed when it reaches 9% of the portfolio. I buy what I consider great businesses that are fairly priced, but value investors will want to wait for a better entry point. Good growing businesses do not come cheap, but over time, they grow and grow. If you want a solid growing dividend income and good total return that is defensive in the human resources data processing business, ADP is the right investment for you.

The total return for the Good Business Portfolio is behind the Dow average from 1/1/2022 to May 20 by 3%, which is a loss below the market loss of 14% for a total portfolio loss of 17%. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2021 First Quarter Earnings and Performance Review.”

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